Growth outlook lifts shares as Fed taper talk helps dollar

Richard Hubbard

5 Min Read

LONDON (Reuters) - Signs of a solid U.S. recovery boosted world equities on Monday although concern that this may encourage the Federal Reserve to reduce its economic stimulus put pressure on emerging markets.

A traffic controller at a constructing site is reflected on a stock quotation board at a brokerage in Tokyo October 1, 2013. REUTERS/Issei Kato

Surprisingly strong U.S. jobs data on Friday brought forward expectations for when the Fed could start tapering its stimulus, lifting Treasury bond yields and the dollar without curtailing demand for shares on Wall St or in other major markets. .N

U.S. stock index futures signaled a steadier session as the Veterans Day holiday limits activity.

“Tapering could well come earlier than March now, but people believe there is a little more upside as there were plus points in the (jobs) data,” Alastair Winter, chief economist at brokerage Daniel Stewart, said.

Fed officials, including Chairman Ben Bernanke, have sounded cautious about the prospect for early tapering since the jobs data though many investors are waiting for Bernanke’s nominated successor, Janet Yellen, to give her views before the U.S. Senate on Thursday.

“Janet Yellen is going up to the Senate and they are going to ask her about the taper. She is not going to say ‘I’m not telling you’,” Winter said.

Meanwhile the expectations for U.S. growth helped lift European shares .FTEU3 by 0.1 percent and off one-week lows during a subdued morning session. .EU

Earlier the recovery hopes had boosted Japan’s Nikkei by a hefty 1.3 percent .N225, lifting it from one-month lows.

MSCI’s global barometer of world shares .MIWD00000PUS added 0.2 percent though it was still down 1.7 percent from the near six-year highs touched at the end of October when it seemed the Fed might not taper until well into next year.

But Asian shares reflected the concern in emerging markets that an earlier cutback in Fed stimulus and higher bond rates would attract capital back toward the United States.

Sentiment in Asia was also hit by data showing a sharp rise in China’s inflation rate to an eight-month high, which fanned worries that policy could tighten just when factory output and export data suggest the world’s No. 2 economy may be stabilizing after a period of slower growth.

Emerging Asian currencies also came under pressure on the capital outflow fears, pushing the Indian rupee down 1.3 percent to 63.281 per dollar and the Indonesian rupiah down 1 percent to 11,551 per dollar, a one-month low.

DOLLAR REBOUND STALLS

The dollar .DXY retraced some of its gains against the world’s major currencies despite the talk of a more imminent tapering but was well supported just below the two-month high set on Friday after the data.

The change in expectations has been reflected in the U.S. Treasury market where yields on the 10-year benchmark jumped to 2.75 percent on Friday, from 2.60 percent. These now offer a pick up over equivalent European and Japanese bonds.

“The dollar has come off slightly, but the defining factor is the rise in U.S. yields,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The euro was flat at $1.3375, and not that far from a two-month trough of $1.3295 plumbed on Thursday when the European Central Bank surprised the market by cutting its main rate to a record low 0.25 percent.

The euro market is focused on GDP data later this week for the 17-nation bloc for hints about the region’s economic recovery prospects after recent positive numbers.

In commodity markets gold was taking a big hit from the tapering speculation, sliding to a three-and-a-half week low just under $1,280 an ounce to add to Friday’s 1.5 percent decline.

“Strength in bond yields and the dollar has created some weakness for gold,” said Saxo Bank senior manager Ole Hansen.

Brent crude oil rose 50 cents a barrel to around $105.60 after Iran and six world powers failed to reach a deal on Tehran’s nuclear program, and after Chinese data pointed to a rise in fuel demand in the world’s biggest energy consumer.